Trading, Hedging, and Portfolio Management

Your Lifeline in a Risky World

Trading, Hedging, and Portfolio Management Risk Services

The professionals at CMRA have had many years of experience managing portfolios that ranged up to many hundreds of billions of dollars in size and included a wide variety of derivatives. Our experience includes: managing asset portfolios for absolute and relative performance, managing large asset-liability portfolios for absolute performance, managing funds of funds, managing diverse product types including all the major fixed income and equity assets as well as CDOs, CLOs and CDO equity. We have direct experience at banks, broker-dealers, asset managers, GSEs, and insurance companies. We have employed all the major types of risk control and assessment. We are intimately familiar with the theory and practice of different types of hedging.

Our many years of hands-on experience trading assets and managing liabilities across a wide variety of products have caused us to be particularly attuned to the differences between theoretical and practical solutions. Our advice is informed by the realization of what works in practice and by where to use sophisticated analysis and where to use rules of thumb. While good advice needs to take into account the most up-to-date analytic techniques, it needs also to take account of the limitations of theory and practice in the markets. We are uniquely positioned to accomplish that task.

Selected Trading Services

Trading and Capital Market Strategy

Our experience as traders helps us advise clients on trading topics ranging from strategy and new business acquisition to crisis management and due diligence on complex trading strategies.

Analyzed structured finance products businesses for both sell-side and buy-side clients and advised on structuring, pricing, and risk management enhancements

Developed strategic plans for trading desks at major broker dealers and asset managers

Performed due diligence reviews and "risk diagnosis" on a number of potential hedge fund investments

Asset Liability Management

Mismatches between assets and liabilities - whether they arise from duration/convexity gaps or liquidity differences - can be managed through a thorough understanding of the risks. Members of our team have decades of experience running large portfolios funded through either debt or repurchase agreements, and have either directly navigated or advised clients on each of the major crises in the past 25+ years.

Designed and implemented asset liability management programs for a variety of US and international insurers (diversified, life, property/casualty, and health)

Served as experts in a number of commercial disputes involving margin calls, repo arrangements, and hedging

Reviewed the asset/liability management framework and approach at a wide range of clients, including regional banks, GSEs, and diversified financials

Risk Mitigation and Hedging

Our senior professionals have successfully managed risk mitigation and hedging for large portfolios and enterprises, and bring that hands-on experience to the table when advising clients on important risk mitigation strategies. Our multidisciplinary experience positions us at the intersection of hedging theory and market practice, and our advice is informed by both cutting-edge academic theory and practical expertise.

Advised multiple clients on hedging strategies to manage the risks of asset-backed securities and derivatives

Provided several end-user clients with independent advice on effective execution, structuring, and documentation of OTC derivatives used for hedging

Served as experts in a number of litigation and arbitration cases related to hedging, mitigation of risk, and replicating hedge portfolios

Portfolio Allocation and Optimization

Our hands-on experience tackling a wide range of portfolio allocation and optimization challenges in portfolios of up to $1 trillion in size allows us to bring a unique set of insights to our clients' portfolio allocation and optimization needs.

Served as experts in both SEC enforcements and commercial litigation cases involving portfolio diversification, asset allocation, and portfolio optimization

Advised multiple institutional investors and other fiduciaries on risk budgeting to create optimal returns given a stated overall risk appetite

Transaction Services

Reviewed the asset/liability management framework and approach of several regional banks

Evaluated risk management practices of sizeable Korean broker/dealer

Evaluated risk measurement, limits, policies and procedures and reporting processes of several large banks

Drafted and reviewed risk management policies and practices for many banks, investment banks and broker/dealers

Reviewed of risk management policies and procedures relative to best practices

Conducted BWIC on behalf of client

Negotiated municipal swap on behalf of a client

Conducted Market Quotation process for Event of Default (EOD) unwind

ISDA Terminations, Valuations, and Negotiations

We have hands-on experience as drafters and users of ISDA's derivatives documentation, including the various forms of the Master Agreement, Credit Support Annex, etc. In addition, our team has advised a number of clients, ranging from broker dealers to hedge funds, on a variety of derivatives unwinds and terminations (both voluntary and involuntary), and is well-versed in the journey (through either negotiation/mediation or litigation) towards an agreed upon termination value for a derivatives portfolio.

Assisted over 15 clients in the negotiation of derivatives settlement values with the Lehman estate

Served as experts in a variety of bankruptcy cases involving the termination of OTC derivatives (interest rate, credit, currency, equity, and exotic) and the interpretation of ISDA documents of various vintages (e.g., 1987, 1992, 2002, etc.)

Provided strategical advice in several pre-litigation reviews of complex derivative valuation in bankruptcy

Provided "fair value" opinions on baskets of illiquid securities and derivatives, and independently reviewed marks generated and relied upon by sell-side and buy-side clients

Sophisticated Analytical Modeling

We have experience not only with providing sophisticated analytical modeling, but also with interpreting model outputs to draw actionable conclusions and to understand the effects of model limitations. Our modeling services are focused around not just math, but also input control and assumption validation. Clients call upon us to advise them on challenges that often necessitate a complex analytical framework, but also rely on us to communicate to them the limitations of any potential solution and to succinctly translate model results to layperson-friendly presentations and prose.

Produced independent valuations for a variety of cash and derivatives portfolios with tens of thousands of individual positions, including those without directly observable market pricing

New Products

New products require diligence, creativity, and a keen understanding of what constitutes a "new" product rather than a variation on an existing product. We have both evaluated and structured new products for our clients, and have also advised clients on products that may be "new" to them. Our principals are directly responsible for the creation of derivatives products, like interest rate collars, that are commonly used today.

Assisted clients in building and expanding derivatives businesses, selling and exiting derviatives businesses, and advised on the creation of derivatives product companies

Advised insurance company boards on the risks of entering into new markets and of new retail products (such as variable rate annuities)

Developed innovative guarantee structure for a fund of funds

Managing Liability, Liquidity, Treasury, Funding, and Repo Risks

Our senior professionals leverage their many years of experience managing portfolios of liabilities to advise clients on best practices, risk management, and strategy. At the same time, we have been called upon as experts in a number of disputes related to funding, repo market practice, and the risks posed by liability mismatches or changes in liquidity.

CMRA provides its clients with practical expertise informed by our many years of hands-on experience trading assets and managing liabilities across a wide variety of products:

The liquidity crunch brought home to many investors, portfolio managers, service providers and prime brokers how sharply valuations can diverge when a portfolio becomes unexpectedly illiquid. This was particularly true for highly leveraged portfolios that, as the result of not-always-sharp fluctuations in the prices of securities, found themselves facing margin calls and forced to unwind positions rapidly . . . In such circumstances, "I was a diehard advocate for mark-to-market, and I still believe it's the lesser of evils, but there are times when model-based pricing might make sense," said Ms. Rahl. This would of course imply that the model-based methodology was favored over mark-to-market because either market prices were stale or unavailable, or the relationship between the underlying and the proxy was weak. "The option of using such a valuation methodology would require strict checks and balances within a fund," she said.

- Hedgeworld (July 2008)

In the wake of problems at Manhattan Investment Fund and at Heartland Advisors and the new SEC guidance on "fair value" pricing for funds, CMRA conducted an NAV/Fair Value Practices survey. Participants included hedge funds, fund of funds, mutual funds and traditional money managers.

- AIMA Newsletter (July 2001)

It is often said that in a crisis, the markets move in sync. (correlations go to 1.) Asset classes can also move in opposite directions. "Some correlations go to -1," says Leslie Rahl, president of Capital Market Risk Advisors in New York City. For example, consider the rise of REITs when the NASDAQ was collapsing in 2001.

Leslie Rahl says "People put too much emphasis on asset diversification and not enough on diversifying the more subtle risk factors such sensitivities to volatility, to flights to quality, to credit, etc."

- CFA Magazine (July 2008)

When an investment bank that is supposed to know better loses billions of dollars betting on subprime mortgages, you have to wonder what happened to the concept of risk management. "You can't rely on VaR as your only metric," says Leslie Rahl, president and founder of New York–based Capital Market Risk Advisors. "We recommend people use three to five different metrics. It's like a doctor ordering an X ray, an MRI and a CAT scan — they all tell you slightly different things."

- Alpha (June 2008)

"One of the questions people have to ask themselves is, how will these synthetic instruments behave in times of stress?" says Leslie Rahl, a former Citibank risk expert who now runs Capital Market Risk Advisors, a risk consultancy in New York. Normal risk modeling only approximates normal markets-the real test comes in extreme markets. And as Rahl likes to say, "We have a once in a lifetime crisis every three or four years."